America’s bonds are getting harder to sell

ALEXANDRA CITRIN-SAFADI/WSJ
ALEXANDRA CITRIN-SAFADI/WSJ

Summary

Record issuance raises worries that debt sales will exacerbate volatility.

A series of weak auctions for U.S. Treasurys are stoking investors’ concerns that markets will struggle to absorb an incoming rush of government debt.

A selloff sparked by a hotter-than-expected inflation report intensified this past week after lackluster demand for a $39 billion sale of 10-year Treasurys. Investors also showed tepid interest in auctions for three-year and 30-year Treasurys.

Behind their caution lies a growing conviction that inflation isn’t fully tamed and that the Federal Reserve will leave interest rates at multidecade highs for months, if not years, to come. The 10-year yield—the benchmark for borrowing rates on everything from mortgages to corporate loans—finished the week around 4.5%, near its highest levels since touching 5% in October.

At the same time, the government is poised to sell another $386 billion or so of bonds in May—an onslaught that Wall Street expects to continue no matter who wins November’s presidential election. While few fear a failed auction—an unlikely scenario that analysts said could potentially trigger prolonged turmoil—some worry that a glut of Treasurys will rattle other parts of the markets, raise the cost of government borrowing and hurt the economy.

“There’s been a big shift in the market narrative. The CPI [consumer-price index] report changed everybody’s view of where Fed policy is headed," said James St. Aubin, chief investment officer at Sierra Mutual Funds.

Graphic: WSJ
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Graphic: WSJ

The government funds its operations by selling the world’s safest bonds to investors and dealers at regular auctions. And issuance of Treasurys has exploded since the pandemic began. In the first three months of 2024, the U.S. sold $7.2 trillion of debt, the largest quarterly total on record. That surpasses the second quarter of 2020, when the government was financing a wave of Covid-19 stimulus. It also builds on a record $23 trillion of Treasurys issued last year, which raised $2.4 trillion of cash, after accounting for maturing bonds.

The size of the sales has expanded along with the market for U.S. debt. After poor demand at a series of auctions late last year jarred investors, the Treasury Department eased concerns by shifting to financing America’s deficit mostly with short-term debt. That helped, in part, because the Fed simultaneously signaled a pivot to easier monetary policy: Hopes that interest-rate cuts would come soon helped reassure investors about the Treasury’s strategy.

Now, those hopes are dwindling, and the Treasury is expected to announce its third-quarter borrowing plans at the end of April. The nonpartisan Congressional Budget Office forecasts that the deficit will increase from 5.6% of U.S. gross domestic product to 6.1% in the next decade. Debt held by the public is set to expand from $28 trillion to $48 trillion in that time, up from $13 trillion 10 years ago.

Graphic: WSJ
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Graphic: WSJ

Wall Street doesn’t expect the Treasury to raise auction sizes of longer-term notes and bonds until next year. But the government must also contend with refinancing a chunk of its bonds. A record $8.9 trillion of Treasurys, roughly a third of outstanding U.S. debt, is set to mature just in 2024, according to Apollo Global Management’s chief economist, Torsten Slok.

Investors are also watching how revenues from tax season boost America’s coffers in the coming weeks.

“We’ve been losing liquidity as people and companies pull out money to pay taxes," said Thomas Tzitzouris, head of fixed-income research at Strategas. “We’re in a bit of an air pocket that’s letting the bond market float more freely and yields rise."

One line of support is likely to come from the Fed. Minutes from the Fed’s March meeting, released last week, showed that policymakers are looking to slow the pace of running down the central bank’s large holdings of bonds accumulated to prop up the economy. They would likely reduce the rate at which they let Treasurys mature to $30 billion a month, half of the current $60 billion pace.

Balance-sheet runoff, known as quantitative tightening, is meant to drain the banking system of reserves and increase the market’s share of the sovereign-debt pile. With the Fed paring back that program, and prepping to stop it sometime in the future, investors will have to absorb a smaller net share of Treasury securities. That could support bond prices and remove some upward pressure on yields.

Another factor supporting Treasurys: Global investors have a lot of savings and few viable options to place them. The eurozone and Japan both run current-account surpluses, meaning they take in more money from trade than they spend on imports. Treasurys provide them a safe place to stash their cash and pick up more than 4% of yield. They also offer an easy way to invest dollar-denominated income from trading with America.

Graphic: WSJ
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Graphic: WSJ

The euro and yen are both sinking relative to the dollar, in part because the Bank of Japan is still holding rates low and investors expect the European Central Bank to slash them soon. That could increase demand for U.S. debt, with Treasury yields remaining elevated relative to global alternatives.

That leaves many investors hopeful that as long as inflation continues to trend toward the Fed’s 2% target, Treasury yields will remain under 5%. But some worry the influx of new Treasurys will exacerbate already-volatile markets, particularly if inflation stays sticky. After the CPI report and weak auction Wednesday, the 10-year yield posted its biggest one-day rise since 2022, jumping nearly 0.20 percentage point.

“If we continue to see hot inflation prints, it’s going to keep a lot of people on the sidelines," said Sierra’s St. Aubin.

Write to Eric Wallerstein at eric.wallerstein@wsj.com

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